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Turnover grows but margins take strain in 2012

Total turnover for this year’s top 100 contractors has grown by almost 4 per cent, but this year is already proving a challenge for the industry, and the low margins seen across many of the UK’s top firms speak for themselves.

Despite expectations of a fall in activity last year, output grew, owing partly to the impact of public sector spending cuts being less than imagined, as well as a relatively buoyant year for retail and London office construction.

But investors and consumers are growing ever more cautious, while the effects of government cuts are intensifying across the industry.

What is evident is that the top contractors are increasingly diversifying and looking overseas for work in order to bolster revenues ahead of hoped-for recovery in 2014.

Tough competition

Entry into the CN 2012 list of top 100 contractors has become more competitive, with the turnover of the company ranked 100th being 9.2 per cent higher than that seen in 2011’s review, as 63 firms in this year’s list have reported revenue growth.

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Rydon, which has slipped eight places to prop up the top 100 table, reported turnover of £115.8 million in the year to September 2011, compared with the £106m recorded by last year’s 100th-placed firm J Reddington.

While combined underlying turnover (excluding joint ventures) of this year’s top 100 contractors was up by 3.6 per cent compared with their previous financial years - at £59.8 billion - 2012 has presented several challenges, prompting the industry’s top firms to prepare for further tough times ahead - some through strengthening their overseas footholds.

One example is new entrant Dawnus Construction, which has shot into 89th place after a 74.4 per cent revenue rise, part of which is attributed to significant growth in its ventures across Africa.

The Swansea-based firm expects the continent to continue to contribute around 50 per cent of its revenue, with the remainder gained in the UK.

International expansion remains a strategy across the top companies, with Balfour Beatty and Carillion among those continuing to announce a string of overseas contract wins over the year.

The £1bn ticket

This year’s top five rankings are the same as in 2011, but, unlike last year, three of these contractors reported growth in revenue, including Balfour Beatty - the subject of a major restructure this year that is set to result in the closure of 35 offices.

Three more companies managed to gain entry into the £1bn club in this year’s table compared with last year, while Bam Construct’s turnover fell from £1.03bn to £945.9m, with the firm saying that the market is expected to remain challenging in the medium term.

Those posting turnovers of more than £1bn include Wates, which has risen to 14th place.

ISG has also entered the top 10 despite facing challenges over the current year: one of its core markets - retail - is set to contract after announcements from major chains that they are scaling back expansion plans following poor performance during the prime Christmas sales period.

Despite growing turnover to more than £1bn, Willmott Dixon has slipped one place down the table to 13th, with strong performances from Galliford Try and Mitie bolstering the top 10.

Amey’s 17 per cent growth in revenue meanwhile moves it up to 12th. Skanska, however, has fallen outside the top 10 following the impact of public sector spending cuts, though its pre-tax profits have risen by 16 per cent.

Both Skanska and Bam Construct have spoken of a general move towards lower-value projects as the market shifts amid challenging conditions.

This year’s table has seen some notable exits, including Henry Boot; J Reddington, which re-entered last year; Harsco Infrastructure Services; SDC; and Simons Group.

Others remain despite having recorded significant falls in turnover, such as Durkan, whose 42.7 per cent contraction in revenue saw it plummet down the table. The company suffered the largest drop in places across all 100 firms, falling 36 spots to 95th.

Major movers

Of last year’s top 100 roll call, McLaren is the fastest mover up the table, lying just outside the top 50 following a 75 per cent increase in turnover. The company has enjoyed some significant commercial, industrial and retail wins over the year.

Other developments across the top 100 include Bouygues announcing its takeover of Midlands contractor Thomas Vale (55th in the table) in April, while the firm also bought out the remaining stake of Leadbitter.

Lorne Stewart subsidiary 4th Utility acquired four Rotary divisions after the latter’s Australian parent Hastie went into administration, while the collapse of top 100 regular Doyle hit the headlines this summer.

Facilities management and support services are offering attractive opportunities, with Interserve and Carillion queuing up to strengthen these areas of their businesses.

Carillion announced last month in its half year report that it expects a stronger operating margin after implementing its strategy to cut UK construction activity by a third.

Others, such as Lend Lease, are responding to the calls for growth in infrastructure - forecast to be the strongest sector over the next few years and expected to drive recovery as private commercial activity fails to get going at the speed needed to offset public sector contraction.